Reminiscent of its earlier performances in the month of September, the U.S. equity market is still grappling with high volatility. The uncertainty can be partially attributed to the still elusive rate hike decision of Fed Chair Janet Yellen. Speculations are rife that a market correction is imminent in the near future, triggering further chaos.
Amid such adversities, investors are often on the lookout for ‘cash cow’ stocks that would enable them to rake in more profits.
However, singling out cash-rich stocks alone does not make them a solid investment proposition unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its cash at a high rate of return.
ROE: An Effective Financial Metric
ROE = Net Income/Shareholders’ Equity
ROE helps investors distinguish between profit-generating companies from profit burners and is useful for determining the financial health of a company. In other words, this financial metric enables investors to identify stocks that diligently deploy cash for higher returns.
Moreover, ROE is often used to compare the profitability of a company with other firms in the industry – the higher the better. It measures how well a company is growing its profits without investing any new equity capital in the business and portrays management efficiency in rewarding shareholders with attractive risk-adjusted returns.
Screening Parameters for Solid ROE Stocks
In order to shortlist stocks that are cash rich with high ROE, we added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. In addition, we take a few other criteria into consideration to arrive at a winning strategy.
Price/Cash Flow less than X-Industry: This metric measures how much investors pay for one dollar of free cash flow. A lower ratio indicates that investors need to pay less for a better cash flow generating stock.
Return on Assets (ROA) greater than X-Industry: This metric determines how much profit a company earns for every dollar of asset, which includes cash, accounts receivable, property, equipment, inventory and furniture. Of course, the higher the ROA, the better it is.
5-Year EPS Historical Growth greater than X-Industry: This criterion indicates that continued earnings momentum has translated into solid cash strength.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are 5 of the 12 stocks that qualified the screening:
Macy's, Inc. M: Based in Cincinnati, OH, Macy’s is one of the leading department store retailers in the U.S., operating approximately 870 outlets under the names of Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage and Bluemercury. This Zacks Rank #2 stock has a decent long-term earnings growth expectation of 8.5% and a healthy trailing four-quarter average earnings surprise of 16.3%.
Discovery Communications, Inc. DISCK: Headquartered in Silver Spring, MD, this Zacks Rank #1 stock operates as a global media firm with 3 billion subscribers in more than 220 countries. Discovery Communications offers high-quality content through global brands like Discovery Channel, TLC, Investigation Discovery, Animal Planet and Discovery Science. The stock has a strong trailing four-quarter average earnings surprise of 16.3%.
Zoetis Inc. ZTS: Founded in 1952 and headquartered in Florham Park, NJ, Zoetis manufactures and markets veterinary vaccines, medicines, diagnostic products and related services for livestock and companion animals across the globe. This Zacks Rank #2 stock has a solid long-term earnings growth expectation of 12.6% and a trailing four-quarter average earnings surprise of 15.9%.
Broadcom Limited AVGO: Based in Singapore, Broadcom Limited is a premier designer, developer and global supplier of a broad range of analog semiconductor devices and digital, mixed-signal and optoelectronics components and subsystems. This Zacks Rank #1 stock has a trailing four-quarter average earnings surprise of 7% and long-term earnings growth expectation of 15%.
The Priceline Group Inc. PCLN: Norwalk, CT-based Priceline is one of the largest online travel companies in the world. The company’s travel-related offerings cover hotel rooms, airline tickets, rental cars, vacation packages, cruises, “things to do” at customer destinations and travel insurance. This Zacks Rank #2 stock has a solid long-term earnings growth expectation of 18.3% and a trailing four-quarter average earnings surprise of 6.6%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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